McCloskey's comments on Coase’s theorem

Gracias JM.

McCloskey’s idea on Coase’s theorem redefines its explanatory power. First of all, she affirms that the theorem expounds a severe problem vis-à-vis the capacity of internalizing “social costs” through the State. McCloskey argues that Coase’s theorem presents a view that critiques public policy analysis inasmuch as it studies economics outside of reality. Hence, the lack of understanding of the theorem is born from the non-intelligibility of it due to blackboard economics cosmovision.

Coase’s theorem does not affirm that we already live in the best of possible worlds, but that the analysis of blackboard economists is inevitably false (or just luckily hit the bullseye). This world is the second-best given the existence of transaction costs (and the impossibility of eliminating them). Nonetheless, even if the theorem is, in some way, tragic, the door towards a better world is there.

Thus, the affirmation that the theorem is post-modern is its symptomatic sorrow. It works as an internal critique of the Modernist idea of economics - ideal-types are born dead. The pretense of knowledge of modern economics has written its own obituary - reason killed reason. The crisis is explained through thinking in ideal-types, with the assumption of a possibility of perfect information and the elimination of a real, intrinsic phenomenon of economic activity (i.e., transaction costs). Ultimately, Coase is a critic of the jacobine philosophical-economic zeitgeist and, escaping a Leibnizian optimism, critiques the epistemic access towards effective Pigouvian taxes.

The approach to externalities is based on the assumption that the State can transfer the property rights of the externality in an “efficient” manner through lump sums. The problem is based in the emphasis on the party that generates the externality (which assumes that the externality exists in the first place). Externalities exists if and only if an agent considers it a bad. Speaking about externalities implies jumping from the structural explanation of economic agents as rational agents with hierarchization, but their decisions are assumed as full of content. For example, modern economics textbooks always consider that the music of musician playing on the street is a positive externality. Nonetheless, is it a positive externality for the deaf? Can it even be an externality for a deaf person, regardless of it being positive or negative? Are Christmas carols a positive externality for Scrooge? Modern economics assumes that externalities can be known given the agent that produces it and not, as should be proposed instead, by the agent that really creates the externality that is the “affected”.

Externalities are, in some way, Berkeleyian phenomena which are created through a type of subjective idealism that can only be solved between economic agents and not the State!